The Tax-Free Savings Account (TFSA) has become a valuable investment tool for many Canadians since its inception a little over a decade ago. Earnings from any assets you hold in a TFSA do not incur taxes. It means you do not need to deduct income tax from any interest income. However, a TFSA is not a cash-only account.
By using your available contribution room intelligently, you can turn it into a financial instrument that can unlock financial freedom for you. If you have a TFSA, you can allocate some of your contribution room to high-quality TSX stocks. Any dividend income or capital gains that grow your wealth will not incur taxes, allowing you to enjoy tax-free wealth growth.
While you can use a TFSA to fund short-term financial goals, it serves a better purpose as a tool to buy and hold long-term investments. Investors with a long investment horizon can buy and hold assets that deliver compounded growth over a few years or even decades. To this end, identifying and investing in high-quality stocks is essential.
National Bank of Canada
National Bank of Canada (TSX:NA) is a solid name to consider if you are considering long-term stability, capital gains, and dividend income. The $32.99 billion market capitalization Canadian bank headquartered in Montreal is a domestic bank. While the lack of exposure to international markets means slower growth than the Big Six Canadian banks, it also has its perks.
March 2023 saw several major U.S. banks crumble under macroeconomic pressures. While the Canadian banking sector operates in a more regulated environment that protects it from the effects of a bank shutting down across the border, the development did not spare Canadian banks. Unlike its peers, National Bank of Canada stock recovered quickly after dipping.
As of this writing, National Bank of Canada stock trades for $97.76 per share and boasts a 4.17% dividend yield.
Canadian Pacific Kansas City
Canadian Pacific Kansas City (TSX:CP) might seem like an unfamiliar name. Formerly known as CP Railway, Canadian Pacific Kansas City stock formed after a merger between the former with Kansas City Southern earlier this year.
The development has seen CP stock climb higher and higher on the stock market, despite broader weakness. As of this writing, CP stock trades for $102.5 per share, boasting a 0.74% dividend yield. It is up by 15.51% in the last 12 months and continues trading near all-time highs.
The last decade has seen a new management team come in, cut unnecessary spending, and improve its operational efficiency. After bringing its funds under control, the company’s new management invested in expanding infrastructure and hydrogen-powered rail cars. The merger with Kansas City was the biggest development.
A deal that took several years in the making, the merger wrapped up in April this year. While CP stock might not boast a railway network as extensive as Canadian National Railway, it has the only railway network spanning all the way from Canada to Mexico. CP stock can be an excellent buy-and-hold investment for tax-free capital gains and dividend income in a TFSA.
Foolish takeaway
When gearing up for the long game to achieve financial freedom with the help of a TFSA, you must identify top-notch stocks with the necessary staying power. Besides being well-capitalized and resilient enough to weather economic downturns, the stock should offer stable and sustainable long-term growth.
To this end, National Bank of Canada stock and Canadian Pacific Kansas City stock can be two excellent assets to buy and hold in a TFSA.
